U.S. manufacturing activity deteriorated in July to an almost three-year low, dragged down by slower production and shaky export markets that help explain the Federal Reserve's decision to reduce interest rates on Wednesday.

The Institute for Supply Management's index eased to 51.2 last month from 51.7 in June, according to data released Thursday. Figures above 50 signify expansion, and the median estimate in a Bloomberg survey of economists was for a July reading of 52. Measures of output, factory employment and input prices all declined during the month.

Key Insights

The fourth straight downturn in the overall index of factory activity, inching closer to outright contraction, is consistent with the recent trend of manufacturing weakness throughout the world. Producers are beset by a combination of tepid global economies and trade policies and tariffs that have left supply chains at some companies in disarray.

While manufacturing makes up only about 11% of the U.S. economy, the risk is that further weakness will extend to service providers and prompt those companies to reduce investment and limit hiring, endangering the record-long expansion.

Details of the ISM's report showed a gauge of production declined for the third time in four months, pushing a measure of manufacturing employment to its lowest level since November 2016.

An index of exports from manufacturers dropped to the lowest level since February 2016.

A separate factory index from IHS Markit came in at 50.4 on Thursday. That's the lowest in almost a decade and just shy of contraction, though an improvement from a preliminary reading of 50.

The ISM data showed prices paid by factories for materials used in manufacturing contracted in July for a second month, indicating input costs are getting cheaper amid sluggish global demand.

A gauge of producers' order backlogs retreated by 4.3 points to 43.1, a sign manufacturers have ample capacity to meet demand.

U.S. manufacturing activity deteriorated in July to an almost three-year low, dragged down by slower production and shaky export markets that help explain the Federal Reserve's decision to reduce interest rates on Wednesday.